Apr 1, 2012

Tax morale

Some countries are trapped in an equilibrium where people don't pay taxes and the government is corrupt. High corruption and high tax avoidance (or tax evasion) might reinforce each other. As a consequence the amount and quality of public goods is low. Of course corruption depends on many variables, not only on low tax collection. Tax avoidance (or tax evasion) might also depend on many variables.

I have not seen much research on the broad topic of "tax avoidance", but it seems I have not looked in the right places. There is interesting research in the literature. Probably not much under "tax avoidance" or "tax evasion" but on "tax compliance." The paper "Tax Morale and Tax Compliance from the Firm's Perspective" by Alm and McClellan (Kyklos 2012) is a good example. From the conclusions:

Given that our results show that foreign firms and state owned firms engage in more reporting and less tax evasion than domestic owned firms, government should concentrate its audit efforts on domestic firms. However, our results also show that enforcement efforts (even if better focused) seem to have relatively little impact on reporting. Other policies that have a greater (and positive) impact on reporting include reducing various obstacles to compliance, especially corruption and complexity, thereby providing better taxpayer services and making it easier for firms to pay their taxes.

Of perhaps most importance, our results indicate the crucial role of tax morale in firm compliance: improvements in tax morale have a significant – and positive – impact on reporting. Although specific government policies to improve tax morale remain somewhat elusive, other work (Alm,2011) has shown that such policies for individuals include: emphasizing that paying taxes is the “right” thing to do, publicizing cheaters, stressing the link between the payment of taxes and the receipt of government services, encouraging greater participation in the process by which the use of taxes is determined, addressing perceived inequities in tax treatment, and avoiding policies that suggest that cheating is morally acceptable. A main lesson of our work is that tax morale considerations apply to both individuals and firms, so that policies directed to individuals should have similar effects on firms. In particular, if tax audits are the “stick” of tax enforcement, then these alternative approaches could be the complementary “carrot” used to improve tax compliance.

The "sample size is approximately 8,500 with firms from 34 separate countries."